Free CII London Market Insurance Principles and Practices (LM2) Practice Questions

Sample Practice Questions

Try these 10 sample questions from the CII London Market Insurance Principles and Practices (LM2) practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1Which Lloyd’s organisation manages syndicates on behalf of their members?

   1. A.A managing agentCorrect answer: A
   2. B.A members’ agent
   3. C.A placing broker
   4. D.A coverholder

   Explanation: Lloyd’s: How the market works states: "A managing agent is a company set up to manage one or more syndicates on behalf of the members." A managing agent manages syndicates for members. Members’ agents advise capital providers, brokers arrange placements, and coverholders exercise delegated authority.

   Reference: Lloyd’s: How the market works — Managing agents – managing the syndicates

2. 2Why can direct access to underwriting decision-makers make placing a specialist risk in the London Market attractive to a broker’s client?

   1. A.It lets the broker commit cover without underwriting agreement.
   2. B.It permits quicker decisions about whether the risk can be placed.Correct answer: B
   3. C.It requires every insurer to match the same price and deductible.
   4. D.It makes the first quotation binding on insurers approached later.

   Explanation: Lloyd’s: How the market works states: "Immediate access to decision-makers means that answers on whether a risk can be placed are made quickly, enabling the broker to provide fast, good-value solutions." Access to decision-makers shortens underwriting decisions. It does not delegate binding authority or compel other insurers to match or accept a quotation.

   Reference: Lloyd’s: How the market works — Introduction, market structure

3. 3An insurer offers one unusual industrial risk to a reinsurer, which may accept or reject that risk and negotiate its price individually. What type of placement is this?

   1. A.An obligatory treaty placement
   2. B.A catastrophe portfolio transfer
   3. C.A facultative reinsurance placementCorrect answer: C
   4. D.A surplus treaty automatic cession

   Explanation: Reinsurance Association of America: Glossary states: "Reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the ability to accept or reject and individually price each risk offered by the ceding company." The individual offer and acceptance with freedom to decline identifies facultative reinsurance; an obligatory automatic cession does not.

   Reference: Reinsurance Association of America: Glossary — Facultative Reinsurance

4. 4Using the basic assets-minus-liabilities definition, an insurer has regulatory-valued assets of GBP 48 million and liabilities of GBP 39 million. What is its solvency margin?

   1. A.GBP 9 millionCorrect answer: A
   2. B.GBP 39 million
   3. C.GBP 48 million
   4. D.GBP 87 million

   Explanation: HMRC Lloyd’s Manual: Glossary states: "Solvency margin: the excess of an insurance company’s assets over its liabilities, both being valued in accordance with the relevant regulatory legislation (see also minimum solvency margin)." GBP48m − GBP39m = GBP9m. The other amounts are liabilities alone, assets alone and the sum rather than the excess; all values use the same regulatory valuation basis.

   Reference: HMRC Lloyd’s Manual: Glossary — S, Solvency margin

5. 5A Great Britain employer is required to maintain employers’ liability insurance and has no applicable exemption. What is the minimum required cover?

   1. A.GBP 1 million
   2. B.GBP 2 million
   3. C.GBP 5 millionCorrect answer: C
   4. D.GBP 10 million

   Explanation: GOV.UK: Employers’ liability insurance states: "to cover you for at least £5 million" The minimum is GBP5m. GBP1m and GBP2m fall below it; GBP10m exceeds the requirement but is not the minimum asked for.

   Reference: GOV.UK: Employers’ liability insurance — Required cover

6. 6A large London Market risk is accepted by several insurers, each taking an agreed percentage. What is this underwriting arrangement called?

   1. A.Subscription underwritingCorrect answer: A
   2. B.Facultative obligatory reinsurance
   3. C.A single-insurer portfolio transfer
   4. D.A retrospective premium adjustment

   Explanation: CII Insurance, legal and regulatory states: "Each underwriter that the broker approaches will accept a percentage share. This sharing of the risk between a number of insurers is known as subscription underwriting." Several insurers subscribe percentage shares of the direct risk. This is not necessarily reinsurance, transfer of a whole portfolio or later premium adjustment.

   Reference: CII Insurance, legal and regulatory — chapter 2, C2B, Subscription market

7. 7What is the underwriting purpose of a proposal form?

   1. A.To give the proposer final evidence that cover has already been bound
   2. B.To obtain basic information about the proposer and the proposed riskCorrect answer: B
   3. C.To record the details of a loss after the insured event has happened
   4. D.To list each insurer's final signed participation in the placement

   Explanation: HMRC Lloyd’s Manual: Glossary states: "Proposal form: standard form used in most classes of business to elicit basic information about the proposer and the risk for which cover is sought." The proposal form gathers underwriting information. Evidence of bound cover, post-loss notification and final insurer participation records serve different documentation functions.

   Reference: HMRC Lloyd’s Manual: Glossary — P, Proposal form

8. 8A coverholder has a 'prior submit' binding authority. What does this mean for accepting an individual risk?

   1. A.The coverholder may accept first and report it at renewal
   2. B.The coverholder must obtain approval for each riskCorrect answer: B
   3. C.The broker's instruction replaces the syndicate's decision
   4. D.The authority automatically covers every risk in the class

   Explanation: LMA International Comparative Legal Guide: Insurance and Reinsurance 2026 states: "At the most limited end of the spectrum, “prior submit” or “limited” binding authorities require the coverholder to seek approval for each risk." A prior-submit arrangement retains each underwriting decision with the syndicate; it is not autonomous acceptance followed by later reporting.

   Reference: LMA International Comparative Legal Guide: Insurance and Reinsurance 2026 — Chapter 1, discussion of binding authorities

9. 9Which pair of tasks specifically belongs to an insurer's processing of submitted claims?

   1. A.Assess claim validity and estimate the cost of settlementCorrect answer: A
   2. B.Set new-business premiums and negotiate initial policy terms
   3. C.Select reinsurance retentions and negotiate new outward treaties
   4. D.Select financial investments and manage the insurer's asset mix

   Explanation: CII Insurance, legal and regulatory reference text states: "deal quickly and fairly with all claims submitted; distinguish between real and fraudulent claims; determine the realistic cost of a claim prior to payment (reserving);" Submitted-claim validation and estimating settlement cost belong to claims handling; new-business pricing, outward treaty negotiation and asset allocation address other insurer functions.

   Reference: CII Insurance, legal and regulatory reference text — Chapter 2, H2 Claims personnel

10. 10Under the Senior Managers Regime, what is required before a person starts a role that is a Senior Management Function?

    1. A.Internal certification by the employing firm alone
    2. B.Approval by the relevant FCA or PRA regulatorCorrect answer: B
    3. C.Membership of a recognised professional institute alone
    4. D.Notification to the regulator without obtaining its approval

    Explanation: FCA Senior Managers Regime states: "The most senior people in a firm who perform key roles (Senior Management Functions or SMFs) need FCA or PRA approval before starting their roles." SMF approval is regulatory. Internal certification, professional membership and notification alone do not replace approval before starting the role.

    Reference: FCA Senior Managers Regime — Opening explanation